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What Is Bank Deposit Insurance? How It Can Impact Your Bank Deposits?

Deposit insurance is a type of policy that secures your deposits in your bank account. It covers all deposits in your bank such as money in your savings or current account, fixed deposits, and recurring deposit. Deposit insurance in India is governed by Deposit Insurance and Credit Guarantee Corporation (DICGC), which is a fully owned subsidiary of Reserve Bank of India (RBI).

What is the purpose of deposit insurance?

The primary purpose of deposit insurance is to protect your deposits in your bank. For example, if your bank shuts down permanently, deposit insurance will ensure that you can get all or some of your money back.

Which banks are covered under deposit insurance?

All public sector banks, private banks, foreign banks and co-operative banks are covered under deposit insurance. Only Primary Cooperative Societies are not covered under deposit insurance.

Who pays the premium for deposit insurance?

As of now, banks pay the premium for deposit insurance to DICGC. This is mandatory for all applicable banks. The current premium rate for deposit insurance is 0.05% of the outstanding deposit. As per current rules, a bank’s customers are not required to bear the cost of deposit insurance premium.

What happens if a bank does not pay deposit insurance premium?

If a bank does not pay deposit insurance premium for three consecutive half-year terms, their license can be cancelled by DICGC. Such a bank will be declared a defaulter and information about the same will be published in all leading newspapers. Depositors might be informed about their bank’s status through other communication channels as well.

What is insured amount under deposit insurance?

For your deposits in a specific bank, deposit insurance provides cover of maximum of Rs 1 lakh. This essentially means that if your bank becomes bankrupt and is liquidated, you will get back a maximum of Rs 1 lakh only. For example, if you have 20 lakhs in your bank, you will get back only Rs 1 lakh in case your bank is liquidated.

Can you increase deposit insurance limit?

As of now, customers do not have a choice to increase deposit insurance. It will be Rs 1 lakh only, irrespective of how much money you have in your bank account. However, you can take some steps to increase applicable deposit insurance in an indirect manner. Here are some options:

  • Open accounts in different banks: If you open accounts in different banks, each of these accounts will be eligible for deposit insurance of Rs 1 lakh. For example, if you have five accounts in five different banks, your overall applicable deposit insurance will be Rs 5 lakh.
  • Open joint accounts: You can open joint accounts in your bank with different family members to increase the applicable deposit insurance limit. For example, you can open one joint account with your wife, another with your father, another with your mother, etc. For each of these joint accounts with different set of names, the applicable deposit insurance will be Rs 1 lakh.

Is 1 lakh enough for deposit insurance?

Deposit insurance limit in India is currently among the lowest in the world. Given below is the deposit insurance limit of other major economies.

  • Russia –      USD 19,210       (~ Rs 13.62 lakh)
  • Brazil –       USD 64,025      (~ Rs 45.39 lakh)
  • Canada –    USD 72,254       (~ Rs 51.22 lakh)
  • Japan –       USD 88,746      (~ Rs 62.92 lakh)
  • France –     USD 108,870     (~ Rs 77.19 lakh)
  • Australia – USD 182,650     (~ Rs 130 lakh)
  • US –            USD 250,000    (~ Rs 177 lakh)

Is there a plan to increase deposit insurance limit in India?

The deposit insurance limit was Rs 5,000 in 1968. It was increased to Rs 1 lakh in 1993. Since then, the 1 lakh limit has not changed in the last 26 years. With recent crisis like situation in case of PMC Bank, deposit insurance has become a talking point and many depositors want it to be increased. It is possible that deposit insurance limit may be increased in the near future in the interest of depositors. Even State Bank of India (SBI) has recommended that deposit insurance limit be increased to Rs 3 lakh, comprising Rs 1 lakh for savings account and another 2 lakh for term deposits.

Are your bank deposits at risk?

India may have one of the lowest deposit insurance limits, but its history shows that no scheduled commercial bank has failed since liberalization. Whenever there was trouble with any bank, RBI and the government had intervened to help resolve the crisis. So, the risk of losing money is less in case of customers of scheduled commercial banks.

However, things are different in case of cooperative banks. In the past, 351 cooperative banks have failed and DICGC had to pay Rs 4,822 crore in claims. So, if you have deposited your money in a cooperative bank, you definitely need to be cautious.

Make it a point to read your bank’s annual reports to ensure that its finances are healthy and NPAs (Non-performing assets) are under manageable levels. Also, it would be better to park your money in different banks and in different joint accounts.

About Satya Singh

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